After spending millions on lobbying (despite the lobbying ban in place for banks who received bailout money), it looks like the banking industry has spent and lied its way into delaying Senator Durbin's cram down bill.
I am shocked, dismayed, and disgusted that in Washington, it's business as usual when it comes to regular people getting a break against powerful interests who throw money (including taxpayer money) at politicians.
According to today's Wall Street Journal, Senate Republicans are continuing their campaign of "no" and walking in lock step to kowtow to the banking industry. The end result: banks probably get the FDIC relief they want, but regular people will not get the right to have their upside down home loan treated the same way any other upside down loan is already treated.
In my opinion, this loophole should have been closed long ago, for some very good reasons.
First, the home lending market is vastly different from what it was 30 years ago, when this special exception was written into the Bankruptcy Code. The evolution of the home lending industry is such that lenders do not need any special protection to protect the availability and affordability of home loans. Lenders and their lackeys in the Congress have continued to tell the lie that cram downs would make home loans so much more expensive than they are currently, and this tactic appears to have worked.
The second reason to get rid of this special set-aside for these loans is that it will not result in increased costs for borrowers. How do we know this? Well, as mentioned above, most loans are already subject to cramdowns, including many different types of home loans - for example, on second homes, investment properties, and multiunit properties where an owner occupies one of the units. If cram down opponents were telling the truth, then we would see pricing and availaility differences between the loan products that could be crammed down, and owner-occupied loans, which are not. According to an audit of nearly 300 different loan products offered by several large lenders (just google "Adam Levitin" "cram down" and you can read the paper and judge for yourself), there is no difference in pricing or availability based on whether a loan can be crammed down. The bottom line is that bond rates and competition determine home loan availability and pricing, not back end risk factors. For example, in this very tough economy, home loan rates are nearly half what they were in the heyday of a few years ago. Why? Because benchmark interest rates like Treasury bond rates and the Prime Rate are much lower now than they were then.
The third reason to do this is that, unlike so many other measures in Washington, this one will not cost taxpayers a penny, because the bankruptcy system pays for itself through its fee structure.
The fourth reason for a cram down is that lenders actually make more money on a cramdown when compared to foreclosing on, holding, and reselling a home whose value is less than the loan balance. For a California property, a lender will spend an average of $70,000 in hard dollars for every foreclosure. The lender's total losses (lost interest income, etc.) are estimated at nearly $150,000 per house foreclosed. This problem is compounded in a declining market, such as the one we are in now.Then there's the drag effect of REOs on housing prices and local property tax bases, which harms already hurting local communities.
And by the way, where do you think the banks look to recoup their bad loan losses? If banks are right about cramdowns increasing loan costs, then it stands to reason that foreclosure losses are already being passed on to borrowers. If they are, then why are loans cheaper now than they were when the housing boom was happening, as noted above?
But the most important reason for Congress to do this is simple: it's the right thing to do for millions of American families who are saddled with houses they cannot sell to pay off their loans because of the market, and loans that contain ridiculous terms when compared to reality.
Banks and their kept politicians may have stolen a real opportunity to fix a root cause of the current world economic crisis. People are very angry about the state of things. Unfortunately, this shameful act of greed at the expense of common sense and fairness will likely extend what now appears (despite the lip service from pundits) like it's turning into a depression - maybe not on Wall Street, but certainly on Main Street.
This is why you need to support H.R. Bill 1207. Look it up. Congress still does not know where $2.2 Trillion dollars went.